Wilhelm Wilhelmsen Holding Update Q3

WWL, Wilhelm Wilhelmsen Holding’s largest asset, accounting for about half of the overall value, came in with some good numbers yesterday, mainly due to High & Heavy recovery as well as synergies kicking in ahead of schedule following the recent merger and thereby lowering their overall cost base. This took the market by surprise and since the report the stock has climbed by 20% on the highest trading volume in 7 months.

On the one hand High & Heavy recovery ought not to shock the market as Caterpiller came in with great sales numbers on Oct. 24th (there is a high correlation between WWL High & Heavy sales and Caterpillar sales). On the other hand, WWL’s CEO gave a subdued outlook during the Q2-presentation three months ago. One might say that this is yet another case of ”under-promise, over-deliver” from the Wilhelm Wilhelmsen group.

Mining

A major reason to be bullish on WWL’s prospects going forward, and perhaps a major contributor to the stock performance the last couple of days, is that they are performing well despite the fact that income from the mining sector is still at only 15% of what it was at the peak in 2012, which means there is a lot of earnings potential as the life cycle of current mining equipment gradually comes to an end. This is especially significant as the mining sector is where the highest margins are at, not only in comparison to the car segment but also the other two High & Heavy segments, construction and agriculture. All three H&H segments appear to be recovering following a 5-6 year drag.

The bearish argument for WWL is that cars sales, which account for 60% of the overall volume, is in what appears to be the beginning of a cyclical decline after many years of festivities, especially in the US. This may partly be offset in a brief period of time by all the hurricanes of late which have destroyed a large number of cars that need replacement, but the structural decline appears to be on the horizon. On top of that the CEO said there is still some overcapacity in the market putting pressure on rates. One could argue that performing well in a declining environment is bullish as well as the fact that no new ships were ordered in the quarter by the competitors.

In case of a trade war?

What would happen if the geo-political freaks who rule this precious world wake up on the wrong side of bed one morning and decide to engage in a trade war by charging tariffs on imports. While it would not be the end of international trade, it would unquestionably be a big blow to car carrier companies, especially.

But there is a flip side to that coin, one which I had not considered when I warned about the above scenario earlier in the year: Whenever countries engage in trade wars the result has historically been higher inflation. Higher inflation = a flight to commodities = increased investment in the mining space = the highest margin areas for WWL. So while a trade war may at first glance look like mayhem for the WWL stock it may turn out to not be that bad.

Central bank money printing is another argument for ”hiding” in the hard asset commodity space.

Wilhelmsen Maritime Services

Q3 came in slightly lower than expected, even if Q3 has always been a weak quarter both incomewise and marginwise. The EBIT-margin fell to 7,4%, below the 9% thresshold the company has set for itself. One-off currency effects is one reason, but the more structural reason, margin pressure, is still having an impact. As a result I have lowered my valuation slightly from 525 MUSD to 490 MUSD as a cautionary measure. However, the company cites restructuring benefits as a reason for optimism going forward. Interestingly, during the Q&A this morning the CEO hinted that guidance longer term will probably be higher than 9% now that they have sold off lower margin businesses.

Treasure

Treasure currently trades at 35% discount to Hyundai Glovis on the Seoul stock exchange, which is on the high side historically. Since the shareholder agreement with Glovis has been changed allowing Wilhelmsen to sell more than half of their position it would indicate a sale might be imminent. If all of that was paid out to shareholders in the form of a special dividend it would equate 40 NOK (their entire stake is worth 70 NOK per WWH share).

Suppose all of the Glovis shares were sold rendering Treasure an empty shell, there is speculation that WMS could be spun off into Treasure further illuminating the values of the holding company.

NorSea Group

Wilhelmsen incurred an accounting loss of 40 MUSD from reclassifying NorSea from associate to subsiduary in the books due to increasing their stake in the company to a controlling one during the quarter going from 40% ownership to now 72%, making NorSea a more significant asset going forward.

Current discount to NAV – 38%

My estimate of the fair value of WWIB sits at 333 NOK per share, which equates to a discount to NAV of 38%, which is the same as the end of last quarter. So while the stock trades at an all time high of 258 NOK the discount gap hasn’t narrowed at all and is still as attractive as three months ago. Here is the updated Excel sheet: wwhq32017